OBLIGATIONS AND CONTRACTS

CHAPTER 4: EXTINGUISHMENT OF OBLIGATION

A. PAYMENT OR PERFORMANCE (Art. 1232)

- delivery of money and/or the performance in any other means of an
obligation

General Rule: There must be complete payment or performance before

an obligation is extinguished

XPN: (The obligation is still extinguished even if there is no complete

performance)

1. The obligation is substantially performed in good faith (Art. 1231)

- Substantial performance must comply to the essential requirements
- The obligor cannot completely perform/fulfill the obligation due to
fault other than his

2. The oblige accepts the performance knowing its incompleteness or

irregularity (ESTOPPEL) (Art. 1235)
- There is no protest or objection
- The law does not require any form of protest or objection, in case
the oblige will protest

Forms of Payment:

1. Application of payment

2. Dacion en pago/Dation in payment

- Title is transferred to the oblige as an accepted equivalent of the
performance of the obligation

Requisites:
a. There is a performance of the prestation in lieu of
payment
b. There is difference between the prestation due and that
which is given as substitute
c. There is an agreement by the parties that the delivery of
the thing due will extinguish the obligation

Art 1245: The law on sales shall govern dacion en pago

3. Payment by cession/cession in payment

- The obligor abandons ALL his properties to his creditors, the
proceeds thereof is applied as payment to his obligations

Requisites:
a. There is plurality of debt
b. There is partial or relative insolvency by the debtor
c. The assignment involves all properties of the debtor
d. Acceptance by the creditors

Kinds:
a. Contractual (Art. 1255)
Consent of all the creditors is required
 b. Judicial – the law on FRIA (Financial Rehabilitation and
Insolvency Act) shall govern

Effects of Payment:
a. The assignment does not make the creditor the owner of
the property
b. The debtor is released only up to the net proceeds of the
properties sold

Dation in Payment (DIP) Cession in Payment (CIP

As to no. of creditors One Two or more
As to solvency The debtor my not be The debtor must be
insolvent insolvent
As to object A thing Universality of all the
properties of the debtor
As to effect The obligation is The debtor is released up
extinguished up to the to the net proceeds of the
extent of the value of the property ceded.
thing delivered

4. Tender of payment

- The debtor offers payment or fulfillment of obligation to the creditor;

AND
- The creditor refuses to accept payment

Requisites:
a. It must comply with the rules on payment
b. Must be unconditional and for the whole amount
c. It must be actually made

Exception to Tender of Payment:

a. Creditor is absent or unknown or does not appear at the
place of payment
b. Creditor is incapacitated to receive payment at the time
the debt is due
c. Creditor refuse to give a receipt without just cause
d. Two or more persons claim the right to collect
e. The title of the obligation has been lost

5. Consignation

- Deposit to of obligation to court after the creditor refuses to accept

payment or fulfillment of the obligation
- The obligation is extinguished
- There must be tender of payment before consignation may be
made

Requisites:
a. There is a debt due
b. There is tender of payment
c. There is previous notice of consignation to persons
interested in the fulfillment of obligation
d. Must be placed at the judicial disposal of the court (Art.
1258)
 e. After consignation, the persons interested must be
notified (Art . 1258)

Art. 1260: Debtor may ask the judge to order the cancellation of the
obligation

B. LOSS OF THE THING DUE (Art. 1267)

Doctrine of Unforeseen Event

- The obligor is placed in difficulty of performance due to fortuitous
event
- Applies only to obligation to do (personal obligation)

C. CONDONATION/REMISSION OF DEBT

- the creditor renounces his right to demand payment from the debtor

Requisites: (Art. 1270)

a. It must be gratuitous
b. It is accepted by the obligor (no special form of acceptance)
c. Parties must have the capacity
d. It must be inofficious
e. Must comply to the forms of donation

D. CONFUSION OR MERGER OF RIGHTS (Art. 1275)

- it is the merger of character of creditor ad debtor in one and the

same person

E. COMPENSATION

- Parties are debtors and creditors of each other

Requisites:
a. Each obligor is bound principally and is, at the same time a
principal creditor of the other;
b. Both debts consist of:
o Sum of money; OR
o Consumable of the same kind and quality
c. Two debts be due
d. Both must be liquidated and demandable
e. There must be no claim of third person, or retention – if there
exists, it must be communicated in due time to the debtor.

Art. 1284: Compensation of rescissible and voidable contracts

- Still subject to compensation before they are judicially rescinded or
avoided
- Prior to such, they are still considered valid contracts

Non-compensable debts:
a. Art. 1287: Contract of Deposit
 b. Debts arising from contract of commodatum
c. Claim of Support
d. Obligation arising from criminal offense (Art. 1208)
e. Payment of Taxes – no offsetting of taxes against claims that the
taxpayer has against the government

F. NOVATION

- Creation of new obligation

Modes:
a. Changing the object or principal condition
b. Substituting another in place of debtor
c. Subrogating a 3rd person in place of creditor

Requisites:
a. Previous valid obligation
b. Agreement of parties to the new obligation
c. Extinguishment of the old obligation
d. Validity of the new obligation

Kinds:
a. Express
b. Implied – old and new obligation are incompatible with each other in
every point

Test of Incompatibility:

Whether or not the two obligations can stand together

G. EXPROMISION AND DELEGACION (Art. 1293)

1. Expromision (no knowledge of old debtor)

- Takes place when the substitution of debtors is effected with the
consent of the creditor at the instance of the new debtor even
without the knowledge or against the will of the old debtor.

Effect of Insolvency:

- The new debtor’s insolvency will not revive the action of the creditor
against the old debtor whose obligation is extinguished by the
assumption of debt by the new debtor

2. Delegacion (concurrence of new debtor is required)

- The substitution of debtors is effected with the consent of the

creditor at the instance of the old debtor with the concurrence of
new debtor

Effect of insolvency:

General Rule: the right of action of creditor can no longer be revived

Exception:
 a. The insolvency of the new debtor was already existing and of
public knowledge at the time when the original debtor delegated
his debt
b. When such insolvency was already existing and known to the
original debtor when he delegated his debt

H. LEGAL AND CONVENTIONAL SUBROGATION (Art. 1300)

1. Legal subrogation (Without Agreement)

- Takes place by operations of law. It is presumed when:
a. A creditor pays another creditor who is preferred even without
debtor’s knowledge;
b. A third person (not interested) pays with the express or tacit
approval of the debtor;
c. A person interested in the fulfillment of the obligation pays,
without prejudice to the effects of confusion as to the latter’s
share (Art. 1302)

-effect (Art. 1303)-

- Transfers to the person subrogated the credit with all the rights
appertaining thereto, either against third persons or against the
debtors.

2. Conventional subrogation (with express agreement)

- Takes place when there is an agreement of the original parties and

third person, that the person paying the debt shall succeed to all
rights and remedies of the original creditor.